The New York State of Wine: e-Commerce Reaches the Supreme Court

What's wine got to do with e-commerce? More than you might think at first blush. Two cases currently before the Supreme Court may signal how the high court approaches future online sales-related disputes between states.

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Nearly anything can be bought online these days—from new automobiles to
the latest in zydeco music. But forget about buying a basic bottle of wine in
the 24 states that prohibit direct wine shipments bought online from a winery or
reseller located out-of-state. In fact, eight of those states—Florida,
Georgia, Indiana, Kentucky, Oklahoma, Maryland, Tennessee, and Utah—make
it a felony to ship certain wine shipments from out of state directly to
consumers instate.

The entire situation devolves into near-lunacy at times. For example, visit a
vineyard in California while on vacation in the Bay Area; you can't even
ship that wine back to yourself if you live in one of the states prohibiting
such direct wine shipments. Conversely, wineries can ship directly to California
consumers if the shipping state reciprocates and allows California wineries to
do likewise. With an estimated 25,000 wineries in the country, to most very
small operations that can't sell very effectively through standard retail
channels, it all sounds very high school.

But like high school, things get worse when cliques collide. New York state
allows New York-based wineries to ship wine directly to customers located in the
Empire State, but bars out-of-state wineries from shipping to New Yorkers
without that same bottle stepping through a three-tier distribution system.
Forget about tasting the wines tapped in the movie Sideways without a
run to your local wine retailer.

On the surface, none of this sounds very fair to anyone familiar with buying
online with a few clicks. A cynic would quip that fairness has nothing to do
with the law. The Federal Trade Commission's own research indicates that
such direct shipment bans reduce "the varieties of wine available to
consumers and prevents consumers from purchasing some premium wines at lower
prices online" and can add 21 percent to the per case price. (See Alan
Wiseman and Jerry Ellig,
How Many Bottles Makes a Case Against Prohibition? Online Wine and Virginia's Direct Shipment Ban.
FTC Working Paper 258, March 2003.)

Still, it's generally perfectly legal for states to treat wineries
sporting an in-state Zip code more favorably. And depending on how the Supreme
Court rules in two cases currently before it, this entire anachronistic
apparatus could remain absolutely valid.

How did an otherwise apparently narrow argument between states and wineries
make it to the Supreme Court? And what does this have to do with the U.S.
Constitution, anyway? Here's the legal situation in a nutshell and a look
at why it's not what decision the Court ultimately comes to, but
how the justices come to their decision that could have significant
ramifications for the multibillion-dollar online sales market.

Commerce Clause Meets the 21st Amendment

The online wine cases before the Supreme Court stem from different federal
cases originating in New York and Michigan. This created what's known as a
"Circuit split" (when the Federal Court of Appeals ruled in opposite
directions—one in favor of the State's regulation and one against).
The appeal to the Supreme Court was argued before the black-robed nine in
December 2004, and a decision is expected sometime before May 2005.

Picking apart every issue touched upon by these cases would easily take at
least two semesters of conlaw to merely scratch the surface. But saving you from
cracking open a stack of briefs and phonebook-thick law texts, here are two
semesters of constitutional law distilled (no pun intended) into a few
paragraphs.

First,
picture the Founders
back in 1787 at the Constitutional Conference in Philadelphia. There's
Alexander Hamilton jawboning with another delegate; there's George
Washington despondent over the recent death of his brother; there's cocky
36-year old Madison in the corner; there's an 81-year old Franklin,
suffering from gout, putting a brave face on proceedings as the man with the
best first name in U.S. history, Gouverneur Morris of Pennsylvania, arrives.

The Revolutionary War is long over, but the federal government is dead broke;
crippling inflation is rampant; the states are killing each other with high
tariffs; the Articles of Confederation are an acknowledged failure; nearly
one-third of state delegates haven't shown up to the conference; and the
large and small states fundamentally can't agree on representation. In
short, C-SPAN would have had a field day. (See
A More Perfect Union: The Creation of the U.S. Constitution.)

When the dust settled at the end of the long hot summer, however, the
Constitution as we all know and love it was signed on September 17, 1787, and
then ultimately ratified, with one of the primary driving forces behind its
successful passage being the end of internecine economic battles between states,
as documented by Madison, Hamilton, and John Jay throughout the famous
Federalist Papers. The resulting solution, commonly known as the Commerce
Clause, is tucked into the Constitution's Article I, Section 8, and grants
Congress the power to "regulate Commerce with foreign Nations, and among
the several States..." From this express federal Constitutional power,
courts have derived an implied anti-power as it were, called the "dormant
commerce clause," which prohibits individual States from unduly interfering
with interstate commerce.

So far, so good. It sure sounds like one State can't prohibit other
States' wineries from shipping wine directly to consumers, right? Clearly
if any other product were at issue, say PCs, this would be a slam dunk ruling
against the States. But not so fast. Jump nearly 150 years ahead to 1933 and the
21st Amendment, which repealed prohibition and made it legal again to sip a
smooth aged scotch at the end of a long day at the office. In doing so, however,
the 21st Amendment also appears to side-step the commerce clause when it comes
to "intoxicating liquors." Section 2 of the 21st Amendment states that
the "transportation or importation into any State... for delivery or use
therein of intoxicating liquors, in violation of the laws thereof, is hereby
prohibited." The key here are the five words "in violation of the laws
thereof," meaning the laws of the State in question. Aha. The plot
thickens, particularly because constitutional amendments later in time are
viewed as trumping earlier constitution sections in direct conflict.

From 1933 on, Congress' use of the Commerce Clause expanded like a
legislative blob to slip federal tendrils into nearly everything, until two
landmark Supreme Court decisions in 1995 and 2000
(Lopezand
Morrison,
respectively) clipped Congress' wings a wee bit. The decisions basically
said: "Whoa, Congress! Federal laws based on commerce clause powers
actually need a clear linkage to the channels, instrumentalities, or activities
with a substantial relation to interstate commerce."

In the end, this wine case boils down to just how far the 21st
Amendment's reach operates to otherwise dig into the broader Commerce
Clause power. End of law lesson.